According to the Chartered Institute of Management Accountants (CIMA) terminology, Activity Based Costing and Management, often abbreviated as ABC, is a technique for activity costing and monitoring. This method entails tracing resource usage and costing final outcomes. Managers can use this strategy to have a better understanding of product and customer net profitability. This improves the business's ability to make value-based and thus more effective decisions.
Mastering the Activity-Based Costing and Management system can be challenging but can be conquered with the help of an accounting and finance certification like the CMA course. Keep reading to know more about the ABC technique and how enrolling in the CMA program can be beneficial for mastering this technique.
What is Activity-Based Costing and Management?
ABC is an accounting system that allocates expenses to activities rather than items or services. This allows for a more accurate allocation of resources and overhead costs to the products and services that consume them.
How Does Activity-Based Costing and Management Work?
If you want to master this method, take up an accounting and finance certification like the CMA course. Here is an overview of how an Activity-Based Costing and Management system works:
- The first stage in ABC is to determine the activities that contribute to the production process of any product and then divide them into cost pools. This is the most important part of the process.
- There are numerous tasks that must be done away with in businesses. These activities do not add value to a product. Identifying non-value-added activities in the manufacturing process will aid in focusing attention on removal by optimising the production process.
- The third step is to identify cost drivers. A cost driver is defined as any factor that causes a change in the cost of an activity. An activity may be associated with multiple cost factors. This step in the ABC technique identifies the elements that determine the activities that drive a cost.
- The workforce of any corporation has to be extremely cooperative in order to successfully pull off the ABC strategy. The next step is to efficiently train staff and disseminate knowledge on the ABC method.
- The final step is to constantly be vigilant about the procedure. People involved in higher managerial roles must strictly keep an eye on the system as and when it is employed. They must periodically do follow-ups and remain in constant touch with their staff to avoid any probable hindrance to the smooth functioning of the system.
Why is Activity-Based Costing and Management Important?
The ABC method is known for its numerous advantages. Here are some of the benefits that it might give businesses:
- The ABC approach helps in increasing the profitability of an organisation. Businesses using this method can generate better revenue and profits. This method helps businesses develop more efficient procedures, identify areas for improvement, and price products more optimally.
- The ABC strategy aids in determining which areas of the business could benefit from any change introduced. This method helps businesses analyse the costs allocated to specific areas or operations. Understanding these factors better helps organisations boost cost efficiency and manage expenses well.
- The ABC method aims to identify every activity that leads to the creation of a product or service. It helps in eliminating functions that do not add value. This helps an organisation in cost-cutting.
- Businesses can improve their processes by incorporating the ABC technique into their accounting procedures. Understanding the manufacturing overhead allows for greater precision in calculating real production costs.
- A better understanding of manufacturing overhead enables a more precise calculation of actual production costs. Hence employing the ABC methodology can prove to be advantageous for businesses if they aspire to optimise their business processes.
Limitations of Activity-Based Costing and Management?
Like all systems, the ABC system, too, suffers from some shortcomings. Here are some of the limitations of the ABC system:
- All overhead expenditures cannot be allocated to individual activities. Cost drivers will not function unless they are generated by a real-time activity that is quantifiable and can be linked to production output.
- The adaptability of the ABC technique is not suitable for all types of businesses since small businesses lack the resources to adapt it.
- Implementing the ABC system is an expensive deal. It is not always possible for organisations to maintain this system owing to the huge expenses that arise out of it.
- The ABC technique works best in complex contexts. If a corporation does not operate in a complicated environment, investing heavily in an ABC installation can prove to be a complete waste of time and resources as the result it will generate will not be useful.
- It is easy to misinterpret the data produced by the ABC system. The manager needs to be vigilant at all times and assign costs that are relevant and do away with irrelevant costs.
- Sometimes the reports generated by the ABC system might not be in line with the profit and loss statements generated by the traditional costing systems. This might give rise to unnecessary confusion in the organisation.
ABC analysis is used in various industries such as the manufacturing industry, automotive industry, retail industry, and in warehousing. Implementing an Activity-Based Costing and Management system gives you more control over your organisation's expenses further enhancing performance. The US CMA program is best suited for professionals who want a strong hold over the Activity-Based Costing and Management system.
The Institute for Management Accountants (IMA) in the United States administers the globally recognised highest certificate in management accounting, Certified Management Accountant (the US CMA program). The CMA certification deals with the best practices of the ABC methodology, corporate finance, risk management, and performance management among other things.
Imarticus Learning is your one-stop destination for world-class training for the CMA certification. The skills developed while studying for the CMA exam with Imarticus ensure the best learning outcomes. Imarticus Learning gives students the best training for the CMA exam that guarantees the best job interviews in Fortune 500 organisations across the globe. Sign up for the CMA Certified Management Accountant course today to become a CMA and conquer the world of finance!